RESULTS ANNOUNCEMENT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018

Transcription

1 Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. XIAOMI CORPORATION (A company controlled through weighted voting rights and incorporated in the Cayman Islands with limited liability) (Stock Code: 1810) RESULTS ANNOUNCEMENT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 The board (the Board ) of directors (the Directors ) of Xiaomi Corporation (the Company ) is pleased to announce the unaudited consolidated results of the Company and its subsidiaries (collectively, the Group ) for the three and nine months ended September 30, 2018 (the Reporting Period ). These interim results have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, and reviewed by PricewaterhouseCoopers, the independent auditor of the Company, in accordance with International Standard on Review Engagements 2410, Review of interim financial information performed by the independent auditor of the entity, issued by the International Auditing and Assurance Standards Board, and by the audit committee of the Company (the Audit Committee ). In this announcement, we, us, and our refer to the Company (as defined above) and where the context otherwise requires, the Group (as defined above). KEY HIGHLIGHTS 2018 Unaudited Three months ended Year-onyear June 30, 2017 change 2018 (RMB in millions, unless specified) Quarteron-quarter change Revenue 50, , % 45, % Gross profit 6, , % 5, % Operating profit/(loss) 2, , % (7,592.0) N/A Profit/(loss) before income tax 2,363.6 (10,263.7) N/A 14, % Profit/(loss) for the period 2,480.5 (10,992.7) N/A 14, % Non-IFRS Measure: Adjusted profit 2, , % 2, % 1

2 Unaudited Nine months ended Year-onyear change (RMB in millions, unless specified) Revenue 130, , % Gross profit 16, , % Operating (loss)/profit (2,016.8) 9, % Profit/(loss) before income tax 10,583.0 (29,126.2) N/A Profit/(loss) for the period 10,085.7 (30,826.3) N/A Non-IFRS Measure: Adjusted profit 6, , % BUSINESS REVIEW AND OUTLOOK 1. Overall financial performance In the third quarter of 2018, we achieved RMB50.8 billion in revenue, representing an increase of 49.1% over the corresponding period of the previous year. Adjusted profit grew by 17.3% year-on-year to RMB2.9 billion. All business segments achieved strong revenue growth, with the IoT and lifestyle products segment experiencing the fastest growth. 2. Smartphones On October 26, 2018, our total shipment of smartphones for 2018 exceeded 100 million units, according to management accounts. Our smartphones segment recorded approximately RMB35.0 billion in revenue for the third quarter of 2018, representing an increase of 36.1% over the corresponding period of the previous year. The growth in revenue was driven by increases in both smartphone sales volume and our average selling price ( ASP ). Smartphone sales volume for the period under review reached 33.3 million units, up 20.4% over the corresponding quarter of the previous year. In the third quarter of 2018, we continued to optimize our product portfolio to strengthen our presence in the mid- to high-end range smartphone market in mainland China. According to management accounts, by October 9, 2018, shipment of our flagship Mi 8 series had reached 6 million units, with the series proving popular among users. During the Singles Day shopping festival in 2018, our Mi 8 ranked 1 st in terms of sales volume in the RMB2,000 to RMB3,000 price range in the smartphone category on Tmall.com and JD.com, according to Tmall.com and JD.com, as well as in the RMB2,000 to RMB2,499 price range in the smartphone category on Suning.com, according to Suning.com. As a result, our smartphone ASP in mainland China continued its ascent from the second quarter of For the period under review, our smartphone ASP in mainland China was 16% higher over the corresponding quarter of the previous year and was 4% higher over the second quarter of Our smartphone ASP outside mainland China also increased by 18%, which can be attributed to the increase in the proportion of shipments in Western Europe. In the third quarter of 2018, the percentage of revenue from smartphones over RMB2,000 accounted for 31% of our total smartphones revenue, according to management accounts. 2

3 3. IoT and lifestyle products In the third quarter of 2018, revenue of the IoT and lifestyle products segment increased by 89.8% to RMB10.8 billion over the corresponding period of the previous year. This revenue increase was primarily due to a rapid growth in our sales of smart TVs. In addition to the strong growth of smart TVs, laptops and several of our ecosystem products such as Mi Band and Mi Electric Scooter also experienced robust sales growth. The global sales volume of our smart TVs grew 198.5% year-on-year for the third quarter of For the first nine months of 2018, the global sales volume of our smart TVs reached 5.2 million units. Our smart TVs monthly sales volume exceeded 1 million for the first time in October During the Singles Day shopping festival in 2018, the sales volume and sales value of our smart TVs both ranked 1 st among all the TV brands on Tmall.com, JD.com and Suning.com, according to Tmall.com, JD.com, and Suning.com, respectively. We launched our smart TVs in the India market in February 2018 and we are now the leading smart TV brand in India, according to IDC Consulting (Beijing) Ltd. ( IDC ). During the period under review, we continued to broaden our IoT product portfolio. On July 23, 2018, we launched Mi Air Conditioner, which received positive reviews from users. As of the end of the third quarter of 2018, there were about 1.98 million users who own more than five Xiaomi IoT devices, excluding smartphones and laptops, representing a quarter-onquarter rise of 16.5%. 4. Internet services Revenue from our internet services segment grew 85.5% year-on-year to RMB4.7 billion in the third quarter of 2018, driven primarily by increasing monetization in mainland China. Advertising revenue grew by 109.8% year-on-year to RMB3.2 billion, driven by continuous optimization of our recommendation algorithm, users increasing engagement of our internet services, as well as higher pre-installation revenue. Revenue from our internet value-added services also grew 49.7% year-on-year to RMB1.5 billion, of which revenue from gaming accounted for RMB652.5 million, a 12.0% year-on-year increase. Revenue from our other internet value-added services grew by 98.6% year-on-year to RMB892.7 million, primarily due to an increase in revenue contribution from our internet finance business and Youpin e-commerce platform. As a result of increased sales of smartphones and user adoption, monthly active users ( MAU ) of MIUI increased 43.4% from million in September 2017 to million in September The average revenue per MIUI user ( ARPU ) for the quarter under review increased by 29.4% over the corresponding period of the previous year to RMB

4 Monetization of our overseas internet services businesses is showing early promise. In the third quarter of 2018, our overseas internet services revenue accounted for 4.4% of all our internet services revenue. The MAU of our Mi TV and Mi Box also achieved strong growth, reaching 15.9 million in September We are also seeing a more significant contribution to internet services revenue from non-smartphone devices. For example, TV internet services revenue accounted for 5.4% of our total internet services revenue in the third quarter of International markets We experienced revenue growth in both mainland China and our international markets in the third quarter of Our mainland China revenue grew 20.9% year-on-year to RMB28.5 billion while our international markets revenue grew 112.7% year-on-year to RMB22.3 billion in the third quarter of Revenue from international markets accounted for 43.9% of our total revenue in the third quarter of Overseas shipments of our smartphones continued to demonstrate strong growth momentum. According to Canalys, our smartphone shipments for Western Europe grew 386% year-onyear and we were ranked fourth in terms of smartphone shipments in the third quarter of Our smartphone shipments for India grew 31% year-on-year in the third quarter of 2018 and achieved the number one market share position in terms of shipments for four consecutive quarters, according to Canalys. For the Diwali Festival in India this year, during the period from October 9, 2018 to November 8, 2018, we recorded orders of more than 6 million smartphones and orders of more than US$1 billion for all of our products. In Indonesia, we were ranked second in terms of smartphone shipments with year-on-year growth of 337%, according to Canalys. According to Canalys, we were ranked top five in the smartphone markets of 30 countries and regions in terms of shipments in the third quarter of Others AI+IOT Artificial intelligence ( AI ) + IoT forms one of Xiaomi s core strategies. As of September 2018, our AI assistant ( ) had more than 34 million MAU, making it one of the most used AI voice interactive platforms in mainland China. Xiaomi s development of AI has been widely recognized and we have won numerous awards. At the World Internet Conference in November 2018, Xiaomi s AI Open Platform for Smart Homes won the World Leading Internet Scientific and Technological Achievements award. At the 2018 China Big Data Industry Ecology Conference, we were selected as one of the Top 50 Chinese Big Data Enterprises. At the third AI WORLD 2018 World Artificial Intelligence Summit, we were selected as one of the TOP 10 AI Leading Enterprises in China. At the 2018 World Artificial Intelligence Conference, our AI assistant ( ) was shortlisted for the SAIL Award, the conference s most prestigious award. 4

5 We continued to promote the development of the AI industry by open sourcing more technologies. During the third quarter of 2018, we announced that MobileAIBench, our endto-end benchmark tool for hardware and neural network frameworks testing on mobile devices, would become a fully open source platform. Empowered by AI, our IoT platform continues to grow and maintain a leading position in the industry. As of the end of the third quarter of 2018, the number of connected IoT devices (excluding smartphones and laptops) on our IoT platform reached approximately 132 million units, an increase of 13.8% from the previous quarter. Efficiency In the third quarter of 2018, we continued to expand our efficient offline channels while enhancing our online channels. As of 2018, we had 499 Mi Homes in mainland China, mainly in first- and second-tier cities. Moreover, to further penetrate lower tier cities and rural areas of China, by the end of the third quarter of 2018, we had more than 1,100 authorized stores in total, compared with more than 360 authorized stores in the second quarter this year. Despite the rapid expansion of our offline channels, our overall operation remained highly efficient with our operating expense ratio at 8.5% for the third quarter of Brand Strategy We adopted a multi-brand strategy to better target different user segments. In response to tech enthusiasts preference for extreme smartphone performance, we launched POCO, a new smartphone brand. The POCO smartphone, first released in India on August 22, 2018, is now available in most of our international markets and is widely popular among tech enthusiasts. We also launched a gaming smartphone brand, Black Shark, through one of our investee companies. Black Shark brings together powerful hardware, cutting-edge innovation, refined build and design, polished software, and gamer-centric services to deliver the ultimate gaming experience to users. On November 19, 2018, the Company and Meitu, Inc. ( Meitu ) entered into a strategic cooperation agreement in relation to, among others, the exclusive global license of the Meitu brand and global license of certain technologies and domain names in relation to all future Meitu branded smartphones under the cooperation and certain smart hardware products. Through this strategic partnership, Meitu s image-related algorithms and technologies can help us to provide better photographic experiences to our users. At the same time, the strength of Meitu s brand among females can also help us continue to expand and diversify our user base. Leveraging on our leading capabilities in hardware, software, AI, internet services, supple chain and efficient new retail network, we believe the strategic partnership can provide a new growth opportunity to our smartphone business. 5

6 Organization Restructuring As we continue to build a sustainable future for the company, we believe organizational management and strategic planning must be prioritized. In this spirit, we implemented several changes that will not only strengthen the capabilities of our headquarters, but also provide opportunities for young talent to rise through the ranks. In the third quarter of 2018, we formed two new departments to further strengthen the management function of our headquarters. The Organization Department, with co-founder, Senior Vice President Liu De as its head, is responsible for recruitment, promotion, training, assessment and remuneration for midto senior-level management, as well as the organizational structure of each department. The Strategic Advisory Department, headed by co-founder, Senior Vice President Wang Chuan, will be responsible for assisting the CEO in formulating company strategy and supervising the strategic execution of each business unit. To streamline our businesses and promote the next generation of leaders, we reorganized Mi TV, Mi Ecosystem, MIUI and Entertainment into 10 new business units, including four internet business units (Internet I, II, III and IV), four hardware product divisions (Mi TV, Mi Notebook, Smart Hardware, Mi Ecosystem), one technology platform (IoT Platform), and one e-commerce division (Youpin E-commerce). 6

7 MANAGEMENT DISCUSSION AND ANALYSIS Third Quarter of 2018 Compared with Third Quarter of 2017 The following table sets forth the comparative figures for the third quarter of 2018 and the third quarter of 2017: Unaudited Three months ended (RMB in millions) Revenue 50, ,099.9 Cost of sales (44,268.7) (28,897.8) Gross profit 6, ,202.1 Selling and marketing expenses (2,186.9) (1,446.7) Administrative expenses (583.3) (296.9) Research and development expenses (1,534.4) (804.8) Fair value changes on investments measured at fair value through profit or loss Share of losses of investments accounted for using the equity method (184.4) (66.7) Other income Other (losses)/gains, net (202.3) Operating profit 2, ,587.8 Finance income, net Fair value changes of convertible redeemable preferred shares 52.9 (13,869.7) Profit/(loss) before income tax 2,363.6 (10,263.7) Income tax income/(expenses) (729.0) Profit/(loss) for the period 2,480.5 (10,992.7) Non-IFRS Measure: Adjusted profit 2, ,

8 Revenue Revenue increased by 49.1% to RMB50,846.2 million for the third quarter of 2018 on a year-onyear basis. The following table sets forth our revenue by line of business for the third quarter of 2018 and the third quarter of 2017: Unaudited Three months ended % of total % of total Amount revenue Amount revenue (RMB in millions, unless specified) Smartphones 34, % 25, % IoT and lifestyle products 10, % 5, % Internet services 4, % 2, % Others % % Total revenue 50, % 34, % Smartphones Revenue from our smartphones segment increased by 36.1% from RMB25.7 billion in the third quarter of 2017 to RMB35.0 billion in the third quarter of 2018, driven by strong growth in both sales volume and ASP. We sold approximately 33.3 million smartphone units in the third quarter of 2018, compared with approximately 27.6 million units in the third quarter of The ASP of our smartphones was RMB1,052.0 per unit in the third quarter of 2018, compared with RMB930.7 per unit in the third quarter of The increase in ASP was primarily due to the robust sales of our mid- to high-end models in mainland China, such as the Mi 8, and increasing proportion of international smartphone shipments to Western Europe. IoT and lifestyle products Revenue from our IoT and lifestyle products segment increased by 89.8% from RMB5.7 billion in the third quarter of 2017 to RMB10.8 billion in the third quarter of 2018, primarily due to the rapid growth in demand of our smart TVs, laptops and several sought-after ecosystem products such as Mi Band and Mi Electric scooter. Revenue from smart TVs and laptops, increased by 100.3% from RMB2.1 billion in the third quarter of 2017 to RMB4.2 billion in the third quarter of

9 Internet services Revenue from our internet services segment increased by 85.5% from RMB2.5 billion in the third quarter of 2017 to RMB4.7 billion in the third quarter of 2018, primarily due to greater advertising revenue. Our MIUI MAU increased by 43.4% from million in September 2017 to million in September Average internet services revenue per user, calculated as internet services revenue for the three months ended September 30 divided by the MAU in the corresponding year s month of September increased from RMB16.3 in the third quarter of 2017 to RMB21.1 in the third quarter of Others Other revenue increased by 124.6% from RMB147.0 million in the third quarter of 2017 to RMB330.2 million in the third quarter of 2018, primarily due to an increase in the revenue from hardware repair services. Cost of Sales Our cost of sales increased by 53.2% from RMB28.9 billion in the third quarter of 2017 to RMB44.3 billion in the third quarter of Unaudited Three months ended % of total % of total Amount revenue Amount revenue (RMB in millions, unless specified) Smartphones 32, % 22, % IoT and lifestyle products 9, % 5, % Internet services 1, % % Others % % Total cost of sales 44, % 28, % Smartphones Cost of sales related to our smartphones segment increased by 44.7% from RMB22.7 billion in the third quarter of 2017 to RMB32.8 billion in the third quarter of 2018, primarily due to the increased sales of our smartphones and the appreciation of the United States dollar against the RMB and Indian Rupee. 9

10 IoT and lifestyle products Cost of sales related to our IoT and lifestyle products segment increased by 89.1% from RMB5.1 billion in the third quarter of 2017 to RMB9.7 billion in the third quarter of 2018, primarily due to the increased sales of smart TVs and laptops and the appreciation of the United States dollar against the RMB. Internet services Cost of sales related to our internet services segment increased by 51.2% from RMB988.9 million in the third quarter of 2017 to RMB1,494.9 million in the third quarter of 2018, primarily due to increased infrastructure service spending as a result of higher user traffic and engagement. Others Cost of sales related to our others segment increased by 180.8% from RMB90.2 million in the third quarter of 2017 to RMB253.6 million in the third quarter of 2018, primarily due to increased hardware repair costs. Gross Profit and Margin As a result of the foregoing, our gross profit increased by 26.4% from RMB5.2 billion in the third quarter of 2017 to RMB6.6 billion in the third quarter of The gross profit margin from our smartphones segment decreased from 11.7% in the third quarter of 2017 to 6.1% in the third quarter of The fluctuation of currency exchange rate continued to put pressure on our smartphone gross margin in the third quarter of We will continue to closely monitor changes in the exchange rates of the Unites States dollar against the RMB and Indian Rupee and will take necessary measures to mitigate exchange rate impact. The gross profit margin from our IoT and lifestyle products segment increased from 10.2% to 10.5%, while the gross profit margin from our internet services segment increased from 61.2% in the third quarter of 2017 to 68.4% in the third quarter of Thus, cumulatively, our gross profit margin decreased from 15.3% in the third quarter of 2017 to 12.9% in the third quarter of Selling and Marketing Expenses Our selling and marketing expenses increased by 51.2% from RMB1.4 billion in the third quarter of 2017 to RMB2.2 billion in the third quarter of 2018, primarily due to our enhanced marketing efforts, such as advertising in relation to the World Cup and several TV shows, as well as the expansion of our marketing department. Salaries and benefits relating to our selling and marketing personnel increased primarily due to the increased headcount to accommodate for the rapid growth of our business. 10

11 Administrative Expenses Our administrative expenses increased by 96.4% from RMB296.9 million in the third quarter of 2017 to RMB583.3 million in the third quarter of 2018, primarily due to the expansion of our administration departments, including the management, human resources and accounting teams, as well as increases in the consultancy and professional service fees. Salaries and benefits relating to our administrative personnel increased primarily due to the increased headcount to accommodate for the rapid growth of our business. Research and Development Expenses Our research and development expenses increased by 90.7% from RMB804.8 million in the third quarter of 2017 to RMB1,534.4 million in the third quarter of 2018, primarily due to the expansion of our research and development efforts for our smartphone and internet services businesses. Salaries and benefits relating to our research and development personnel increased primarily due to the increased headcount to accommodate for the rapid growth of our business. Fair Value Changes on Investments Measured at Fair Value Through Profit or Loss Our fair value changes on investments measured at fair value through profit or loss decreased by 90.3% from RMB672.5 million in the third quarter of 2017 to RMB65.3 million in the third quarter of 2018, primarily due to the smaller changes in fair value gains of our equity and preferred share investments in the third quarter of Share of Losses of Investments Accounted for Using the Equity Method Our share of losses of investments accounted for using the equity method increased by 176.3% from RMB66.7 million in the third quarter of 2017 to RMB184.4 million in the third quarter of 2018, primarily due to share of loss of iqiyi, Inc. (NASDAQ Stock Exchange Stock Code: IQ) in the third quarter of Other Income Our other income increased by 144.3% from RMB106.1 million in the third quarter of 2017 to RMB259.1 million in the third quarter of 2018, primarily due to increase in government grants and increase of income from wealth management products. Other (Losses)/Gains, Net Our other (losses)/gains, net changed from RMB222.2 million net gains in the three months ended 2017 to RMB202.3 million net losses in the three months ended 2018, primarily resulting from the foreign currency loss recorded in the third quarter of 2018 due to the appreciation of the United States dollar against the RMB. Comparing to foreign currency gain recorded in the third quarter of

12 Finance Income, Net Our net finance income increased by 448.9% from RMB18.2 million in the third quarter of 2017 to RMB100.1 million in the third quarter of 2018, primarily due to increase in our interest income. Our interest income increased primarily due to more bank deposits which generated higher interest received. Fair Value Changes of Convertible Redeemable Preferred Shares Changes in the fair value of our convertible redeemable preferred shares were recorded as fair value changes of convertible redeemable preferred shares. Fair value changes of convertible redeemable preferred shares changed from a loss of RMB13.9 billion in the third quarter of 2017 to a gain of RMB52.9 million in the third quarter of After the completion of the Global Offering, all of our Preferred Shares were converted to our Class B Shares. The fair value of each of Preferred Share is equivalent to the fair value of each of our ordinary shares on the conversion date, which is the Offer Price in the Global Offering. Income Tax Income/(Expenses) Our income tax expenses changed from RMB729.0 million in the third quarter of 2017 to an income tax income of RMB116.9 million in the third quarter of 2018, primarily due to: 1) an increase of deferred tax assets, and 2) a subsidiary becoming qualified as a Key Software Enterprise which enjoys a preferential income tax rate of 10%, which result in a reversal of over accrued income tax expense during the third quarter of Profit/(Loss) for the Period As a result of the foregoing, we had a loss of RMB11.0 billion and profit of RMB2.5 billion in the third quarter of 2017 and the third quarter of 2018, respectively. 12

13 Third Quarter of 2018 Compared with Second Quarter of 2018 The following table sets forth the comparative figures for the third quarter of 2018 and the second quarter of 2018: Unaudited Three months ended June 30, (RMB in millions) Revenue 50, ,235.5 Cost of sales (44,268.7) (39,583.7) Gross profit 6, ,651.8 Selling and marketing expenses (2,186.9) (2,075.7) Administrative expenses (583.3) (10,456.9) Research and development expenses (1,534.4) (1,363.6) Fair value changes on investments measured at fair value through profit or loss Share of losses of investments accounted for using the equity method (184.4) (128.5) Other income Other (losses)/gains, net (202.3) 46.7 Operating profit/(loss) 2,210.6 (7,592.0) Finance income/(expense), net (32.3) Fair value changes of convertible redeemable preferred shares ,532.7 Profit before income tax 2, ,908.4 Income tax income/(expenses) (275.8) Profit for the period 2, ,632.6 Non-IFRS Measure: Adjusted profit 2, ,

14 Revenue Revenue increased by 12.4% to RMB50,846.2 million for the third quarter of 2018 on a quarter-onquarter basis. The following table sets forth our revenue by line of business for the third quarter of 2018 and the second quarter of 2018: Unaudited Three months ended 2018 June 30, 2018 % of total % of total Amount revenue Amount revenue (RMB in millions, unless specified) Smartphones 34, % 30, % IoT and lifestyle products 10, % 10, % Internet services 4, % 3, % Others % % Total revenue 50, % 45, % Smartphones Revenue from our smartphones segment increased by 14.7% from RMB30.5 billion in the three months ended June 30, 2018 to RMB35.0 billion in the three months ended 2018, driven by growth in both the sales volume and ASP of our smartphones. We sold approximately 33.3 million units of smartphones in the three months ended 2018, compared with approximately 32.0 million units in the three months ended June 30, The ASP of our smartphones was RMB1,052.0 per unit in the three months ended 2018, compared with RMB952.3 per unit in the three months ended June 30, The increase in ASP was primarily due to the strong sales of our mid- to high-end models such as the Mi 8 and increasing proportion of international smartphone shipments to Western Europe. IoT and lifestyle products Revenue from our IoT and lifestyle products segment increased by 4.1% from RMB10.4 billion in the three months ended June 30, 2018 to RMB10.8 billion in the three months ended September 30, 2018, primarily due to the growth in revenue for our existing products, particularly laptops and other smart hardware products. Revenue from smart TVs and laptops, increased by 1.2% from RMB4,178.0 million in the three months ended June 30, 2018 to RMB4,227.2 million in the three months ended

15 Internet services Revenue from our internet services segment increased by 19.5% from RMB4.0 billion in the three months ended June 30, 2018 to RMB4.7 billion in the three months ended 2018, primarily due to a rise in our advertising revenue. MIUI MAU increased by 8.5% from million in June 2018 to million in September Average internet services revenue per user, calculated as the ratio of internet services revenue for the three months ended June 30 and respectively, divided by the respective MAU in June and September of each period, increased from RMB19.1 in the three months ended June 30, 2018 to RMB21.1 in the three months ended Others Other revenue decreased by 16.9% from RMB397.4 million in the three months ended June 30, 2018 to RMB330.2 million in the three months ended 2018, primarily due to service revenue decline in India resulted from a change in distribution arrangements. Cost of Sales Our cost of sales increased by 11.8% from RMB39.6 billion for the three months ended June 30, 2018 to RMB44.3 billion for the three months ended Unaudited Three months ended 2018 June 30, 2018 % of total % of total Amount revenue Amount revenue (RMB in millions, unless specified) Smartphones 32, % 28, % IoT and lifestyle products 9, % 9, % Internet services 1, % 1, % Others % % Total cost of sales 44, % 39, % Smartphones Cost of sales related to our smartphones segment increased by 15.4% from RMB28.5 billion in the three months ended June 30, 2018 to RMB32.8 billion in the three months ended 2018, primarily due to the increased sales of smartphones and the appreciation of the United States Dollar against the RMB and Indian Rupee in the third quarter of

16 IoT and lifestyle products Cost of sales related to our IoT and lifestyle products segment increased by 2.9% from RMB9.4 billion in the three months ended June 30, 2018 to RMB9.7 billion in the three months ended 2018, primarily due to the increased sales of smart TVs and laptops and the appreciation of the United States Dollar against the RMB in the third quarter of Internet services Cost of sales related to our internet services segment increased by 1.5% from RMB1,473.0 million in the three months ended June 30, 2018 to RMB1,494.9 million in the three months ended 2018, primarily due to increased infrastructure service spending as a result of higher user traffic and engagement. Others Cost of sales related to our others segment increased by 0.5% from RMB252.3 million in the three months ended June 30, 2018 to RMB253.6 million in the three months ended 2018, primarily due to increased hardware repair costs. Gross Profit and Margin As a result of the foregoing, our gross profit increased by 16.4% from RMB5.7 billion in the three months ended June 30, 2018 to RMB6.6 billion in the three months ended The gross profit margin from our smartphones segment decreased from 6.7% in the three months ended June 30, 2018 to 6.1% in the three months ended The fluctuation of the currency exchange rate continued to put pressure on our smartphone gross margin in the third quarter of We will continue to closely monitor changes in currency exchange rates of the Unites States dollar against the RMB and Indian Rupee and will take necessary measures to mitigate exchange rate impact. The gross profit margin from our IoT and lifestyle products segment increased from 9.4% to 10.5%. The gross profit margin from our internet services segment increased from 62.8% in the three months ended June 30, 2018 to 68.4% in the three months ended Thus, cumulatively, our gross profit margin increased from 12.5% in the three months ended June 30, 2018 to 12.9% in the three months ended Selling and Marketing Expenses Our selling and marketing expenses increased by 5.4% from RMB2.1 billion in the three months ended June 30, 2018 to RMB2.2 billion in the three months ended 2018, primarily due to higher packaging and transportation expenses and salaries and benefits for our selling and marketing personnel. Salaries and benefits for our selling and marketing personnel increased primarily due to the increased headcount to accommodate for the growth of our business. 16

17 Administrative Expenses Our administrative expenses decreased by 94.4% from RMB10,456.9 million in the three months ended June 30, 2018 to RMB583.3 million in the three months ended 2018, primarily due to a one-off share-based compensation in the second quarter of Research and Development Expenses Our research and development expenses increased by 12.5% from RMB1,363.6 million in the three months ended June 30, 2018 to RMB1,534.4 million in the three months ended 2018, primarily due to the increase in total compensation relating to our research and development personnel. Salaries and benefits relating to research and development personnel increased primarily due to the increased headcount to accommodate for the growth in our business. Fair Value Changes on Investments Measured at Fair Value Through Profit or Loss Our fair value changes on investments measured at fair value through profit or loss decreased by 87.6% from RMB526.9 million in the three months ended June 30, 2018 to RMB65.3 million in the three months ended 2018, primarily due to the lesser changes in fair value gains of our equity and preferred share investments. Share of Losses of Investments Accounted for Using the Equity Method Our share of losses of investments accounted for using the equity method increased by 43.5% from RMB128.5 million in the three months June 30, 2018 to RMB184.4 million in the three months ended 2018, primarily due to the share of loss of iqiyi, Inc. (NASDAQ Stock Exchange Stock Code: IQ) in the third quarter of Other Income Our other income increased by 25.0% from RMB207.3 million in the three months ended June 30, 2018 to RMB259.1 million in the three months ended 2018, primarily due to the increase in government grants and increase of income from wealth management products. Other (Losses)/Gains, Net Our other (losses)/gains, net changed from RMB46.7 million net gains in the three months ended June 30, 2018 to RMB202.3 million net losses in the three months ended 2018, primarily resulting from the foreign currency loss recorded in the third quarter of 2018 due to the appreciation of the United States dollar against the RMB. Finance Income/(Expense), Net We had net finance expense of RMB32.3 million in the three months ended June 30, 2018 and a net finance income of RMB100.1 million in the three months ended 2018, primarily due to increase in our interest income. Our interest income increased primarily due to more bank deposits which generated higher interest received. 17

18 Fair Value Changes of Convertible Redeemable Preferred Shares Changes in the fair value of convertible redeemable preferred shares were recorded as fair value changes of convertible redeemable preferred shares. Fair value changes of convertible redeemable preferred shares decreased from a gain of RMB22.5 billion in the three months ended June 30, 2018 to a gain of RMB52.9 million in the three months ended After the completion of the Global Offering, all of our Preferred Shares were converted to our Class B Shares. The fair value of each of Preferred Share is equivalent to the fair value of each of our ordinary shares on the conversion date, which is the Offer Price in the Global Offering. Income Tax Income/(Expenses) Our income tax expenses changed from RMB275.8 million in the three months ended June 30, 2018 to income tax income of RMB116.9 million in the three months ended 2018 primarily due to a subsidiary becoming qualified as a Key Softare Enterprise which enjoys a preferential income tax rate of 10% commencing from 2018, which resulted in a reversal of over accrued income tax expense during the third quarter of Profit for the Period As a result of the foregoing, we had profit of RMB14.6 billion and profit of RMB2.5 billion in the three months ended June 30, 2018 and 2018, respectively. Non-IFRS Measure: Adjusted Profit To supplement our consolidated results which are prepared and presented in accordance with International Financial Reporting Standards (the IFRS ), we utilize adjusted profit as an additional financial measure. Adjusted profit is not required by, or presented in accordance with, IFRS. We believe that the presentation of non-ifrs measures when shown in conjunction with the corresponding IFRS measures provides useful information to investors and management regarding financial and business trends in relation to our financial condition and results of operation, by eliminating any potential impact of items that our management does not consider to be indicative of our operating performance, such as certain non-cash items and the impact of certain investment transactions. We also believe that non-ifrs measures are appropriate for evaluating the Group s operating performance. However, the use of this particular non-ifrs measure has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for analysis of, our results of operations or financial conditions as reported under IFRS. In addition, this non-ifrs financial measure may be defined differently from similar terms used by other companies. 18

19 The following tables set forth the reconciliations of the Group s non-ifrs measures for the third quarter of 2018 and 2017, respectively, the second quarter of 2018, and the first nine months of 2018 and 2017, respectively, to the nearest measures prepared in accordance with IFRS: As reported Three Months Ended 2018 Adjustments Fair value changes of convertible redeemable preferred shares Share-based compensation Net fair value gains on investments (1) (RMB in thousand, unless specified) Amortization of intangible assets resulting from acquisitions (2) Non-IFRS Profit for the period 2,480,484 (52,934) 701,813 (246,437) 2,294 2,885,220 Net margin 4.9% 5.7% As reported Three Months Ended June 30, 2018 Adjustments Fair value changes of Amortization convertible of intangible redeemable Net fair assets preferred Share-based value gains on resulting from shares compensation investments (1) acquisitions (2) (RMB in thousand, unless specified) Non-IFRS Profit for the period 14,632,647 (22,532,721) 10,527,322 (510,945) 521 2,116,824 Net margin 32.3% 4.7% As reported Three Months Ended 2017 Adjustments Fair value changes of Amortization convertible of intangible redeemable Net fair assets preferred Share-based value gains on resulting from shares compensation investments (1) acquisitions (2) (RMB in thousand, unless specified) Non-IFRS (Loss)/profit for the period (10,992,669) 13,869, ,910 (670,085) 611 2,459,433 Net margin -32.2% 7.2% 19

20 As reported Nine Months Ended 2018 Adjustments Fair value changes of convertible redeemable preferred shares Share-based compensation Net fair value gains on investments (1) (RMB in thousand, unless specified) Amortization of intangible assets resulting from acquisitions (2) Non-IFRS Profit for the period 10,085,720 (12,514,279) 11,717,371 (2,590,803) 3,335 6,701,344 Net margin 7.7% 5.1% As reported Nine Months Ended 2017 Adjustments Fair value changes of Amortization convertible of intangible redeemable Net fair assets preferred Share-based value gains on resulting from shares compensation investments (1) acquisitions (2) (RMB in thousand, unless specified) Non-IFRS (Loss)/profit for the period (30,826,259) 38,338, ,295 (3,272,723) 1,834 4,811,457 Net margin -38.8% 6.1% Notes: (1) Includes fair value gains on equity investments and preferred shares investments deducting the cumulative fair value changes for investments disposed in the current period, the impairment provision for investments, remeasurement of loss of significant influence in an associate and re-measurement of investments transferring from financial asset measured at fair value through profit or loss to investments using the equity method, net of tax. (2) Represents amortization of intangible assets resulting from acquisitions, net of tax. 20

21 Liquidity and Financial Resources Other than the fund raised through our Global Offering in July 2018, we have historically funded our cash requirements principally from cash generated from our operations and bank borrowings. Cash and cash equivalents increased by 136.4% from RMB14.9 billion as of June 30, 2018 to RMB35.2 billion as of 2018, primarily due to the completion of the Global Offering of the Company. The net proceeds received by the Company was approximately HK$27.5 billion (equivalent to approximately RMB23.3 billion). Note: The cash resources which the Group considered in cash management including but not limited to cash and cash equivalents, restricted cash, short-term deposits and short-term investments measured at fair value through profit or loss. As of 2018, the aggregate amount of cash resources of the Group is RMB47.1 billion, increased by 72.1% from RMB27.4 billion as of June 30, Consolidated Statement of Cash Flow Unaudited Three months ended June 30, (in thousands of RMB) Net cash (used in)/generated from operating activities (1) (1,335,297) 7,399,225 Net cash used in investing activities (2,228,180) (4,286,376) Net cash generated from/(used in) financing activities (1) 23,002,448 (2,144,294) Net increase in cash and cash equivalents 19,438, ,555 Cash and cash equivalents at beginning of period 14,894,150 14,027,013 Effects of exchange rate changes on cash and cash equivalents 875,672 (101,418) Cash and cash equivalents at end of period 35,208,793 14,894,150 Note: (1) Excluding (1) the increase in loan and interest receivables mainly resulting from the internet finance business; (2) the decrease in trade payables resulting from the finance factoring business; and (3) the increase in restricted cash resulting from the internet finance business, the net cash generated from operating activities was RMB1.1 billion for the three months ended 2018 and RMB8.2 billion for the three months ended June 30, 2018, respectively; excluding the change of borrowings for the internet finance business, the net cash generated from financing activities was RMB23.8 billion for the three months ended 2018 and the net cash used in financing activities was RMB0.7 billion for the three months ended June 30, 2018, respectively. The information in this footnote is based on the management accounts of the Group, which have not been audited or reviewed by the Group s auditor. The accounting policies applied in the preparation of the management accounts are consistent with those used for other figures in this announcement. 21

22 Net Cash (Used In)/Generated From Operating Activities Net cash (used in)/generated from our operating activities represents the cash (used in)/generated from our operations minus the income tax paid. Cash (used in)/generated from our operations primarily comprises our profit for the period adjusted by non-cash items and changes in working capital. For the three months ended 2018, net cash used in our operating activities amounted to RMB1.3 billion, representing cash used in operations of RMB1.0 billion plus income tax paid of RMB0.3 billion. Cash used in operations was primarily attributable to our profit before income tax of RMB2.4 billion, as adjusted by (i) the addback of non-cash items, primarily comprising sharebased compensation of RMB0.7 billion and the impairment provision for inventories of RMB0.5 billion, and (ii) changes in working capital, which primarily comprised an increase in trade payables of RMB7.7 billion, offset by the increase in inventories of RMB5.3 billion, and the increase in prepayments and other receivables of RMB5.4 billion, and the increase in loan and interest receivables of RMB1.7 billion. Net Cash Used In Investing Activities For the three months ended 2018, our net cash used in investing activities was RMB2.2 billion, which was primarily attributable to the net cash used in purchase of short-term investments measured at fair value through profit or loss of RMB44.8 billion, the net cash used in capital expenditures of RMB0.5 billion, the net cash used in the placement of short-term bank deposits of RMB0.7 billion, and offset by the net cash generated from proceeds from the maturity of short-term investments measured at fair value through profit or loss of RMB44.0 billion. Net Cash Generated From/(Used In) Financing Activities For the three months ended 2018, our net cash generated from financing activities was RMB23.0 billion, which was primarily attributable to proceeds from the issuance of ordinary shares relating to the Global Offering of RMB23.3 billion and the withdrawal of restricted cash of RMB3.9 billion, partially offset by repayments of borrowings of RMB4.9 billion. Borrowings As of June 30, 2018 and 2018, we had total borrowings of RMB12.6 billion and RMB9.9 billion, respectively. Convertible Redeemable Preferred Shares As of June 30, 2018 and 2018, our convertible redeemable preferred shares had fair values of RMB150.6 billion and nil, respectively. As of June 30, 2018, our convertible redeemable preferred shares had fair value of RMB150.6 billion. After the completion of the Global Offering on July 9, 2018, all of our Preferred Shares were converted into Class B shares. Therefore, no convertible redeemable preferred shares were recognized as of

23 Capital Expenditure Three months ended June 30, (in thousands of RMB) Capital expenditures 518, ,642 Placement of long-term investments (1) 561, ,400 Total 1,080, ,042 Note: (1) Placement of long-term investments represents equity investments and preferred share investments. Our capital expenditures primarily included expenditures on property and equipment resulting from the construction of and improvements made to our office complex, as well as on our intangible assets. Off-Balance Sheet Commitments and Arrangements As of 2018, except for our financial guarantee contracts, we had not entered into any off-balance sheet commitments or arrangements. Future Plans for Material Investments and Capital Assets As of 2018, we did not have other future plans for material investments or capital assets. Material Acquisitions and Disposals of Subsidiaries and Affiliated Companies During the nine months ended 2018, we did not have any material acquisitions or disposals of our subsidiaries and affiliated companies. Employee and Remuneration Policy As of 2018, we had 16,129 full-time employees, 15,351 of whom were based in mainland China, primarily at our headquarters in Beijing, with the rest primarily based in India, Taiwan, Indonesia and Hong Kong. We expect to continue to increase our headcount in mainland China and our key target markets in the rest of the world. As of 2018, our research and development personnel, totaling 7,137 employees, were staffed across our various departments. 23

24 Our success depends on our ability to attract, retain and motivate qualified personnel. As part of our human resources strategy, we offer employees competitive compensation packages. As of 2018, over 6,203 employees held share-based awards. The total remuneration expenses, including share-based compensation expense, for the three months ended September 30, 2018 were RMB1,982.1 million, representing a decrease of 83.0% as compared with the three months ended June 30, 2018, primarily due to a one-off share-based compensation in the second quarter of Foreign Exchange Risk The transactions of our Company are denominated and settled in our functional currency, the United States Dollar. Our Group s subsidiaries primarily operate in the People s Republic of China and other regions such as India, and are exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the United States Dollar. Therefore, foreign exchange risk primarily arises from recognized assets and liabilities in our subsidiaries when receiving foreign currencies from, or paying foreign currencies to our overseas business partners. We will continue to monitor changes in currency exchange rates and will take necessary measures to mitigate exchange rate impact. Pledge of Assets As of 2018, we had pledged a restricted deposit of RMB2,321.8 million, compared with June 30, 2018, which was RMB4,587.1 million. Contingent Liabilities As of 2018 and June 30, 2018, we did not have any material contingent liabilities. 24

25 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION Unaudited Condensed Consolidated Income Statements For the three months and nine months ended 2018 (Expressed in Renminbi ( RMB )) Unaudited Unaudited Three months ended Nine months ended Note RMB 000 RMB 000 RMB 000 RMB 000 Revenue 3 50,846,214 34,099, ,494,049 79,510,682 Cost of sales 4 (44,268,656) (28,897,847) (113,963,252) (67,996,900) Gross profit 6,577,558 5,202,033 16,530,797 11,513,782 Selling and marketing expenses 4 (2,186,907) (1,446,663) (5,665,445) (3,317,034) Administrative expenses 4 (583,250) (296,940) (11,505,489) (765,988) Research and development expenses 4 (1,534,441) (804,787) (4,001,835) (2,116,787) Fair value changes on investments measured at fair value through profit or loss 8 65, ,472 2,355,084 3,590,472 Share of losses of investments accounted for using the equity method 5 (184,396) (66,733) (296,579) (217,747) Other income 259, , , ,123 Other (losses)/gains, net (202,327) 222,310 (58,003) 211,732 Operating profit/(loss) 2,210,623 3,587,758 (2,016,849) 9,201,553 Finance income, net 100,050 18,229 85,554 10,588 Fair value changes of convertible redeemable preferred shares 12 52,934 (13,869,666) 12,514,279 (38,338,310) Profit/(loss) before income tax 2,363,607 (10,263,679) 10,582,984 (29,126,169) Income tax income/(expenses) 6 116,877 (728,990) (497,264) (1,700,090) Profit/(loss) for the period 2,480,484 (10,992,669) 10,085,720 (30,826,259) Profit/(loss) attributable to: Owners of the Company 2,498,788 (10,989,808) 10,144,983 (30,796,250) Non-controlling interests (18,304) (2,861) (59,263) (30,009) 2,480,484 (10,992,669) 10,085,720 (30,826,259) Earnings/(loss) per share (expressed in RMB per share) 7 Basic (1.126) (3.156) Diluted (1.126) (0.102) (3.156) 25